Income Tax, Property Tax or “None of the Above?”

December 4, 2005

Andrea Neal column for Feb. 3 and thereafter

(EDITORS: Please note ellipsis should go inside quote in graf 5)

725 words

INDIANAPOLIS — Given a choice, which would you rather pay: income tax or property tax? That’s the question posed by House Bill 1008, which would allow county, town and city governments in Indiana to raise local income taxes in exchange for property tax reductions.

Ask Hoosiers to take sides and you’ll find nothing close to a consensus.

"I say neither," says Chuck Bower of Elkhart. "The problem with income taxes is people who don"t work or work for cash under the table don"t pay them. Property taxes are similar in that they penalize people who maintain or fix up their property."

"I am opposed to any increase in income taxes, favoring consumption, and even property, taxes in most instances," says David Nealy of Indianapolis. "My argument has always been that income taxes, particularly those of a progressive or graduated nature, discourage initiative, risk taking and hard work."

Says Clark Sorenson of Bloomington, "I have always felt that taxes on income were more fair than property tax (ELLIPSIS GOES HERE) º While I do not think the rich should be taxed out of existence, I do believe they have the capacity and the obligation to carry a larger share of the tax burden."

These are the varying attitudes facing HB 1008, a priority bill for the Indiana Association of Cities and Towns and the local government officials it represents. The bill passed the House in January, but isn’t expected to get far in the Senate this year.

The issue is not just whether HB 1008 is smart policy. It’s whether other adjustments would need to be made to our tax structure to ensure the right mix and distribution of burden.

Tax mix matters. Lawmakers too often raise one tax here and one tax there without thinking about the effect it will have on various populations or on economic growth.

Hoosiers learned that lesson painfully this fall after the courts ordered a more market-based property assessment system. The change resulted in dramatic tax hikes for many on fixed incomes living in valuable inner-city homes. It was a prime example of how a single change in tax policy can affect the fiscal health of a population.

In the same vein, it would be a mistake to authorize a new local option income tax this year, in response to the property tax revolt, then turn around next year and raise the state income tax to cover budgetary needs, as some lawmakers recently said needs to be done.

If legislators want Indiana to have a strong economy, they cannot look at any tax change in a vacuum, but must see the big picture. Keeping the lowest possible tax burden must remain a primary goal. "Restraining the overall level of state and local taxes is of prime importance in maintaining a thriving state and local economy," the Mackinac Center for Public Policy Research warns.

So where does Indiana stand in comparison to neighboring states against which we compete for people and for jobs?

Our fixed 3.4 percent income tax is higher than Illinois (3 percent), lower than Michigan (4.1) and on average lower than Ohio and Kentucky, which have graduated rates based on income. Our sales tax is 6 percent, the same as Kentucky and Michigan, but higher than Ohio (5 percent) and lower than Illinois (6.25).

Add in property taxes, local option income taxes and excise taxes and any competitive edge disappears. Among the 50 states, we rank 22nd in a comparison of state and local taxes as a percentage of income. According to data compiled by the Tax Foundation, Hoosiers paid 9.7 percent of their income in state and local taxes in 2003. That ranks us second highest of the five Midwest states. Ohio tops the list at 10.3 percent with Illinois and Kentucky at 9.4 percent.

In the view of Arthur R. Tait of Goshen, the burden is high enough. "I have never seen any plans that state or local

government have made to curtail spending. On the contrary, I see the various movers and shakers continuing on their merry way just as though the tax dollars were coming from a bottomless pit."

Given a choice between local income taxes or property taxes, Tait is one Hoosier who would like another option: "none of the above."

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